May 7, 2024 News Article

Research Report: A Turning Point for Infrastructure Investment: Why and How?

For an industry that used to have a reputation for being old-fashioned, with an ageing workforce and not the most exciting range of assets to invest in, infrastructure has made quite the turnaround. From digitalization-driven data centers and semiconductor factories, to green transition-borne renewable generation assets, to the more passive yet essential roads and bridges, the asset class today is vast. Its growth story is also a lot more compelling as investors look to future proof their portfolios and capitalize on opportunities arising from the advent of Artificial intelligence and the transition to a sustainable, circular future. Not to mention the gaping hole in infrastructure financing that governments alone have no hope of plugging.

According to World Bank data, there are 675 million individuals globally without electricity, while 2.3 billion lack drinking water, 3.6 billion lack safe sanitation, 1 billion live more than 2 kilometers from an all-season road, and 450 million live beyond the range of a broadband signal. Addressing these challenges would require about $1.5 trillion of investment per year every year until 2030[1].

Meanwhile, private equity activity has slowed, both in terms of fundraising and deal activity. As a result, more investors are switching to a longer-horizon investment lens and prioritizing longer-term yield plays in industries that are less susceptible to macroeconomic factors. A growing appreciation for the role of infrastructure as the lifeblood of our economic and societal future has no doubt been helped by its promise of stable and attractive returns over the long term.

Stability is king

Some of the characteristics driving appetite for infrastructure funds include:

  • Predictable cash flows: Infrastructure assets typically provide essential services to large groups of users who rely on them to meet basic needs. This tends to mean stable and consistent demand over long time horizons. In particular, for core infrastructure assets, cash flows are predictable, thanks to long-term payment agreements and contracts that are not subject to market volatility.
  • Inflation hedge: Infrastructure generally offers some degree of inflation protection, whether through index-linked revenues, regulated frameworks or index-linked contracts enabling rates to rise in line with inflation. Assets without a clear inflation hedge will often have the pricing power to pass on inflationary pressure to end users, thanks to their monopolistic position.
  • Monopolistic position: Due to complex regulatory or legal frameworks, significant planning, building, and development costs, efficiencies of economies of scale and natural geographic restrictions, there are typically high barriers to entry. This often means few or no competitors.
  • Portfolio diversification: With low correlation to other asset classes, infrastructure plays a valuable role in helping to diversify an investment portfolio.

The resilience of infrastructure continues to prove itself in uncertain times, and considering the above unique characteristics, it is no wonder that assets under management in infrastructure funds have increased almost five-fold, to $1.3 trillion, over the past decade, according to Preqin[2].

BlackRock’s $12.5 billion deal in January to acquire Global Infrastructure Partners (GIP) to create a market-leading Infrastructure private markets investment platform[3] is a recent signal of strong conviction in the asset class’s potential.

Evolution of the investor base

So who are the LPs capitalizing on this “golden age of infrastructure investing,” as recently heralded by GIP Chairman and CEO Adebayo Ogunlesi?

Given the long-term nature of infrastructure investments, LPs with long-term liabilities, such as pension funds and insurance companies, represent an important share of the investor base. But others are also honing in on the sector, including consultants and Registered Investment Advisors (RIAs) who at first may have been skeptical, but now see the value in the longevity and risk-adjusted returns of infrastructure investments. As gatekeepers, they represent an important group of advocates.

Institutions like large foundations are also leaning in on infrastructure as an alternative source of yield. For example, core infrastructure investments tend to come with quarterly dividends in addition to long-term NAV appreciation; LPs can reasonably expect a long-term net return of 7-10% from a strongly managed core infrastructure portfolio. Plus there are good liquidity provisions for those who want to get their capital back.

What’s the best way to invest?

There has been a broader recognition of the open-ended structure being the appropriate one for investing in core infrastructure, which is typically associated with a long-term buy-and-hold strategy.

  • GP perspective: When competing for a certain asset, funds with this structure will find themselves at an advantage, versus a GP who may be forced by their structure to sell in a few years no matter the state of the market.
  • LP perspective: The structure relieves LPs of the idea that there is a finite holding period; there is no sense of urgency as with re-investment decisions in closed ended funds. Investors can remain invested and maximize the value of the asset over time.
  • Government perspective: The open-ended structure serves to reassure government counterparties and consortium partners looking to work with entities for the long term, rather than those that who may be looking for the exit route after a few years.

Manager expertise and the mid-market

Despite its long-term investment horizon, infrastructure is not like a bond that will perform with minimal monitoring. This is an asset class where the manager can add significant value through data analytics, engineering and operating expertise, and active management. We are seeing the emergence of sophisticated managers that are able to marry technology with the strong fundamentals of the asset class. They know they need to keep up with the rapid pace of innovation and technological advancements to maximize returns. All of this should play into an LP’s evaluation of the right infrastructure manager for them. Opportunities to put capital to work in infrastructure are only set to grow, so selection matters.

Infrastructure lies at the heart of megatrends like decarbonization and digitization, so mobilization of private capital will be essential to moving things along for the global economy. Across the broad spectrum of private market investors – from the more conservative LPs drawn to core infrastructure to the more bullish looking at higher-risk, opportunistic strategies – there is an awakening to the sheer opportunity offered by these assets’ long lifespans and low risk of technology obsolescence; the opportunity to invest in the new social and economic paradigm.




Research Report: A Turning Point for Infrastructure Investment: Why and How?
Research Report: A Turning Point for Infrastructure Investment: Why and How?